A hedge fund that makes money when markets go crazy has identified the Four Horsemen of the Economic Apocalypse

Markets may be recovering on Friday, but they're as volatile now
as they have been during full-blown crises.

Investors have fled risky bets, hammering banks' share prices.

But not everyone loses money when turmoil hits. Some, like 36
South, are set up to profit from it.

The London-based hedge fund's Black Swan strategy gained 234% in
the chaos after the collapse of Lehman Brothers in 2008.

The fund capitalizes on complacency. It can buy protection
against volatility and sudden price moves cheaply, setting what
it calls volatility traps, and then sell it back to the market
when there's an inevitable crash.

For 36 South, today's volatility is a symptom of a greater
malaise at the heart of the markets, one that won't be solved by
negative interest rates.

"There is this sense of fear in the markets," Anthony
Limbrick, portfolio manager and head of quantitative research at
36 South, said, "but maybe also an embedded expectation
that if something terrible comes to pass, then central banks will
step in to steady the markets. But that market complacency can
vanish in an instant."

Here's the VIX volatility index, also known as the fear index. It
is showing levels approaching those of the eurozone's
sovereign-debt crisis in 2011 and the global financial crisis of
2015:

Investing

"It's an economic disaster driven to a degree
by the slow motion death of supply-side economics," Limbrick
said. "Going subzero on rates doesn't work, and it's getting
harder and harder for central banks to stimulate the global
economy."

"I like to use the analogy that the economic
patient is riddled with cancer — central banks are applying a
defibrillator, but there's only so much electricity the patient
can take before it becomes a burnt-out corpse," he
added.

The strategies employed by 36 South perform
best when markets are volatile.

In an interview in August, after China's stock
market crash, 36 South cofounder Jerry Haworth said the hedge
fund had its "best performance in a couple of years" betting
big on spikes in volatility.

An economic apocalypse could be on its
way.Gene
Page/AMC

The planets are aligning for more market volatility in the next
few years, as the global economy hits strong headwinds. The
central-bank economic models that worked in the past aren't
functioning properly, in part because of changing demographics
and technology.

"You have the Four Horsemen of the Economic
Apocalypse out there as well," Limbrick said. "You have aging
baby boomers, tech disruption, a globalized labor market, and
massive debt."

And if that's not enough to spook investors,
they're realizing that the next bank crisis will most likely
end in losses on bonds and deposits rather than another
bailout.

Shares in big banks such as Credit Suisse and Deutsche Bank
have hit decades-old lows this week as a result.

"There's also something out there haunting
people, and that's open bank resolution," Limbrick said. "The
market is working with the probability that their cash in the
bank could be bailed in, and that's acting as a potential
weight on the market."

It's getting impossible to ignore all the
risks, Limbrick says.

"We know how leveraged banks are," he said.
"If they get in trouble, then that money is gone. People have
been avoiding thinking about it."